The Truth About Yongye International (Part 2)

In Part 1 of this article, I discussed the strong efficacy of Yongye International’s (NASDAQ:YONG) products, the fame of the company, and some fundamentals, strengths, and weaknesses regarding the company’s stock as an investment. Here I will discuss some of the many unfounded criticisms that have served to severely suppress the stock price.

Bogus Criticisms of the Investment:

(This is only a partial list; and, please, be prepared to laugh because these short-side contentions are beyond silly.)

(2) The company’s products are commodities. (Remember, just a second ago, they didn’t work. Now, somehow, they’re a commodity. How can it be a commodity if it doesn’t work? You see, in this stock space at least, if the short-side’s first bogus criticism doesn’t work, they just make up another one and another one and another one…)

(3) The company’s branded store network doesn’t exist because they don’t have enough marketing personnel to have branded all those stores. (Remember, just a second ago, the company was selling commodities. Now, somehow, there is nowhere to sell the commodities. Why did they bother to make the bogus point that the products are commodities if there is, supposedly, no place to sell them?)

(4) The company is a fraud, and it doesn’t really exist. (Remember, just a second ago, the company’s branded store network supposedly didn’t exist because the company doesn’t have enough marketing personnel to have branded all those stores. Now, somehow, the company doesn’t exist. Why did they bother to make the bogus point that the branded store network doesn’t exist because the company doesn’t have enough marketing personnel to have branded all those stores if there is, supposedly, no company?) (Another and another and another of the many sources for this.)

(5) The company isn’t generating cash. (Generating cash? Why would the short-siders care, if they were being honest? The products supposedly don’t work. No, wait a minute, supposedly they are also commodities. No, wait a minute, that can’t be right because they can’t simultaneously not work and be commodities. No, wait a minute, the branded stores supposedly don’t exist; and no one in their right mind would be concerned about the products supposedly being commodities. Oh, no, sorry, I forgot for a second; the company doesn’t exist, and no one in their right mind would be concerned about the marketing staff supposedly needing to brand all the stores personally. Other than the short-siders spewing a pack of falsehoods, this all makes no sense, now, does it?)

(6) The corporate structure is concerning. (That is, of course, the corporate structure of the company that, supposedly, does not exist. Need I say more?)

(7) One article explaining the benefits of fulvic-acid-based plant nutrients was, purportedly, written by someone who now holds unusual beliefs. (Source)

I hope you laughed as you read that. I laughed a lot as I wrote it. On the serious side, when inconsistencies between criticisms regularly occur like this, you know that the communicators are just trying to damage the stock price. They do not care about whether there is actually anything wrong with the investment.

Also, none of these criticisms are valid; and you don’t keep skipping from invalid criticism to invalid criticism if you have a valid criticism. Clearly, the short-siders don’t have a valid criticism. This isn’t a battle between shorts and longs. This is a battle between people who would say anything to damage a company and its stock price and people who have worked hard to truly understand an investment.

To quickly illustrate that none of these criticisms are valid:

(1) & (4) These contentions were already addressed in Part 1 of this article.

(2) There has been, and is, a serious worldwide issue with fulvic acid product quality. Also, you can easily misapply the product in general or by plant type, et cetera. (You can actually even over-apply it.) This best-product-use training aspect keeps the product from being a commodity as well. Also, the kind, amount, and form of the additive nutrients that you choose to include with the fulvic acid are important, particularly to get the best results for a certain kind of plant(s) or other condition(s); so, even among truly high-quality fulvic acid products, there are important differences.

This is the reason why we will begin to see multiple, more-specialized plant products from Yongye, versus just the one. (These more-specialized products have been under development and testing for quite some time now.) Commodities aren’t this niched. Also, Yongye has extraction processes, formulas, and mixing processes that are patented or patent-pending. (Source: 2010 Q3 results press release and 2010 3Q 10-Q, page 17. Also, the patent number for Shengmingsu, the company’s plant product, was provided here.) Years and years from now, fulvic acid products specifically for a certain type of plant(s) growing under a certain kind of conditions may be a commodity; but we are a very long way off from that.

(3) The vast majority of the branded stores weren’t branded by company employees. They were branded by distributor personnel and store owners. They are (pre-existing) independently owned stores, not stores owned by Yongye; but they do have Yongye signage, both inside and outside, and feature Yongye products. (Source: 2009 10-K, page 7)

(5) The company will be operating cash flow positive for 2010. Companies that grow revenues very quickly (i.e., companies that are very successful) often do not generate cash or much cash in their early years because as revenues grow, inventory and accounts receivable tend to grow accordingly and significant capital expenditure is necessary to expand to be able to produce more product and/or services. Also, in Yongye’s case, they recently have been producing at full capacity after the peak sales season, i.e., the second and third calendar and fiscal quarters, to build up inventory for the next peak season. (They did this in ‘09/’10 and, as of the ’10 third quarter conference call, they were doing it in ‘10/’11.)

This leads to even more inventory versus cash. Acquisitions, like the coal mine and Hebei distribution rights acquisitions announced and very largely, if not entirely, paid for in 2010, also take away from cash. In brief, cash generation without large adjustments is only a valid way of evaluating a mature business, less any acquisitions. Furthermore, in the case of a company like Yongye that has an annual peak sales season, only year-over-year comparisons are valid. Quarter-over-quarter comparisons are invalid.

(6) The fact that the U.S. company (Yongye International) owns the British Virgin Islands (BVI) company, which owns the Hong Kong (HK) company, which owns the People’s Republic of China (PRC) company, which is 5% owned by another PRC company is in no way concerning. It is a straight line US←BVI←HK←PRC relationship, with a 5% exception (i.e., non-controlling interest) inside the PRC. (Source: 2009 10-K, pages 9 and 10)

This same straight line relationship is extremely common for U.S.-listed Chinese companies; and the 5% exception, or a like exception of a like percentage, is fairly common for one of these companies. In fact, a lot of non-Chinese companies have BVI and/or HK entities and/or a non-controlling interest(s). Simply put, this is all very common stuff.

(7) Even if it is more than just purported, it is one person and one supporting article. There is a vast array of supporting research from around the globe done over the course of many years. To attempt to raise a question regarding fulvic acid efficacy based upon one author’s unrelated beliefs is ludicrous.

Conclusion:

For those of you who think the company or its products may, somehow, still be a fraud in part, consider the following. Normally, this stock would be trading at something like 50 to 100 times trailing earnings. $1.01 (trailing 12-month earnings) x 75 = $75.75. Even if there was a 20% chance that Yongye is a 100% fraud, which there most certainly is not—there is no chance, the stock should be trading at $60.60. At the 2/18/11 stock price of $7.15, that equates to a 7.5-to-1 payout on a play on which you should be getting a 1-to-4 payout.

This isn’t: “Adjusting for risk.” This is stupid. If they gave payouts like this in Vegas, Vegas would go broke in a day.

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